Experience shows that there are two interesting legal forms for foreign founders in particular: the Limited Liability Company (LLC for short) and the US Corporation.
What is the better choice? Good question. Let’s take a closer look at the LLC and the Corporation.
An LLC is a limited liability company. The LLC is a legal person and can be used both to set up a company and to hold assets. An LLC can be founded by only one person, which is then referred to as a “single member LLC”. If several people are involved in an LLC, one speaks of a “Multi-Member LLC”. An LLC was created to promote individual entrepreneurial freedom while protecting the entrepreneur’s personal assets.
A corporation (corporation) is also a legal entity and is usually used most often to run a large company with shareholders and investors who work with large sums of money for their daily business. Nevertheless, this legal form is also very suitable for smaller companies who would like to take advantage of a public limited company. The corporation offers many advantages, especially if you only want to be an investor and do not plan to emigrate to the USA. The taxation of an LLC in Indian, for example, depends very much on the assessment of the India tax authorities. A corporation can often be the better choice. A corporation has a board of directors to oversee the company and a corporate officer to carry out day-to-day business. There is nothing to prevent all tasks from being carried out by one person. All shares can also belong to only one shareholder.
In both company models, the owner and the company are legally separate from one another. Specifically, this means that owners or shareholders are legally protected in the event of a lawsuit against the company.
Unlike the LLC, the corporation is taxed independently because it generates its own income. The Corporation itself only pays federal taxes at the prevailing tax rate of 21%. Unlike salaries and bonuses, dividends are unfortunately not tax deductible. If the corporation distributes a dividend to the shareholders, they will be taxed again in the personal income tax return. This double taxation is a disadvantage of the corporation.
As a “hybrid” between a corporation and a sole proprietorship, the Limited liability Company LLC takes advantage of the “pass-through” control system. Since the owners receive tax-deductible salaries and bonuses here, this system does not allow corporate profits to be taxed directly by the IRS, but rather to process them via the owner’s individual income tax return. So there is no corporation tax, but an income tax. An LLC thus avoids the dreaded double taxation.
Profits and losses are also handled differently. At LLC, business income is the owner’s income. The corporation’s profits and losses are held by the company and are not passed on directly to the owners. So you stay in the company. As a corporation owner, you can choose whether or not to pay dividends. If the profits remain in the company, the tax burden remains at 21%.
A disadvantage of the LLC compared to the Corporation is that the LLC has to pay a self-employment tax and the so-called FICA tax on its annual share of the profit. These wage taxes are deducted from the payroll and paid to the IRS, the tax authority. FICA taxes include social security and Medicare taxes. Company shareholders are not self-employed and therefore do not have to pay this tax. Entrepreneurs who work as employees have to deduct the FICA tax from their salary.
Corporations are no better or worse than an LLC, each legal form has its advantages and disadvantages. But not every company is suitable for every legal form. You have to consider what you want to focus on: flexibility? Simple bureaucracy? Tax benefits? The corporation, in particular, offers smaller companies some advantages that are not immediately apparent.
What’s interesting: the legal form of the LLC was passed in all 50 states to promote the growth of smaller companies. Since then, this legal form has been the most popular and flexible corporate structure for smaller companies and starters. Statistics show that it is the best option for the majority of start-ups, and emigrants also like to choose this business model.
The corporation, on the other hand, is often chosen by entrepreneurs who stay in Indian and only want to do business with one company in the States because of its tax advantages.
It is a difficult decision that should not be made prematurely. Above all, the way in which you are taxed should be an important factor in deciding the company model. Every business situation is different.
Here it is always advisable to talk to an expert before making a choice between the legal forms. They can find the optimal business model for their own company.